2 Undervalued Stocks Found in Nifty 500 — And 4 More Worth Watching Closely

Introduction

Every few months, I run a full screening exercise on the stock market. It is not done to generate a quick list, but to do a proper, deep analysis from scratch.

This time, I decided to restrict the universe strictly to the Nifty 500. These are the top 500 companies listed on the NSE, ranked by full market capitalisation. They represent the most liquid, most widely tracked, and most institutionally owned companies in India.

Starting with 500 companies and applying five sequential filters:

• ROCE,
• EPS growth,
• Debt levels,
• Free cash flow consistency, and
• Relative P/E

I shortened the list down to just 21 genuinely high-quality businesses.

Then I did a Discounted Cash Flow calculation on each of these 21 stocks and applied a 15% Margin of Safety.

At the end of this entire process, only 2 stocks came out as undervalued (buy zone). 4 more are on the watchlist. These too are fundamentally strong, but not yet at the right price.

That is what this post is about. I want to take you through the full process. I’ll show you what I screened for, why, and what I found.

I also want to give you a proper perspective on each of the 6 stocks. The idea is to share something which is genuinely useful. How? You will come to know how you can use my Stock Engine to prepare a similar stock screener for yourself.

How the Screening Was Done

This is the methodology.

The five filters I used, applied in this exact order, were:

• Filter 1 — ROCE 5Y Average above 15%. Return on Capital Employed tells you how efficiently a business uses the capital deployed in its operations. I look at the 5-year average — not a single year — because one good year can be an accident. Sustained ROCE above 15% is the sign of a business with a genuine competitive advantage. Out of 500 stocks, 325 cleared this.

• Filter 2 — EPS 5Y CAGR above 10%. I want to see that the company’s per-share earnings have been growing consistently. A growing EPS means a growing intrinsic value. Stocks with flat or falling EPS — regardless of how “cheap” they look — are not value opportunities. They are value traps. After this filter, 184 stocks remained.

• Filter 3 — Debt-to-Equity below 0.3. A highly indebted company is always at risk, especially in a rising interest rate environment or during a business slowdown. I prefer companies that are near-debt-free — businesses that can fund their own growth without depending on borrowed money. This narrowed the list to 131.

• Filter 4 — Free Cash Flow positive in all 5 years. This is the most demanding filter, and it shows. A company can report good profits while struggling for actual cash. FCF is what the business truly generates after paying for its operations and capital requirements. A company with 5 consecutive years of positive FCF has demonstrated real, sustained financial health. Only 36 stocks cleared all four filters.

• Filter 5 — P/E at or below the sector median. Within the 36 remaining stocks, I compared each stock’s current P/E against the median P/E of its sector peers. I kept only those trading at or below the sector median — which gives a basic signal that the valuation is not stretched relative to comparable businesses. This brought the list to 21 stocks.

Finally, the filtering was done based on DCF + 15% Margin of Safety.

On all 21 stocks, I ran a Discounted Cash Flow model. The base free cash flow came from the most recent annual data.

• For the first 5 years, I used the company’s own historical EPS CAGR as the growth assumption. I capped the growth rate at 20% to stay conservative.
• For years 6 to 10, I applied a lower, slower growth rate.
• The discount rate I’ve used was 12%.
• The terminal growth rate that I’ve used was 5%.

From the resulting intrinsic value per share, I applied a 15% discount to arrive at the Margin of Safety buy price.

Only stocks whose current market price was at or below this MoS price were called undervalued.

The result:

• 2 stocks in the buy zone.
• 4 stocks very close to the MoS threshold, which were worth watching.

[Please Note: The Stock Engine uses a more complex algorithm to compute the intrinsic value of its stocks. So there will be a difference between the intrinsic value stated here vs what is visible inside the Stock Engine app. You can read about the Stock Engine’s Algorithms here.]

The 2 Stocks in the Buy Zone

Stock 1 — Chambal Fertilisers and Chemicals (CHAMBLFERT)

NSE: CHAMBLFERT | Sector: Fertilisers | CMP: Rs. 450.80 Intrinsic Value (DCF): Rs. 641 | MoS Buy Price: Rs. 545 | Discount to IV: ~30%

Chambal Fertilisers is a large urea manufacturer.

The company operates from its flagship plant in Gadepan, Rajasthan. This is a facility that has been running efficiently for decades. What makes Chambal stand out in the fertiliser space is that it is not just another government-dependent business waiting for subsidy cheques. Over the years, the management has worked hard to build a business that is financially clean, operationally efficient, and shareholder-friendly.

Let me present to you a few numbers of the company:

• The 5-year average ROCE is 23.4%, and the current ROCE has actually improved to 25.3%. That is a business that is becoming more efficient with its capital over time. The ROE stands at 22.4% currently and averaged 20.4% over the past 5 years. And here is the detail that I find most reassuring. The company is completely debt-free. Zero borrowings. In a sector like fertilisers, where many players carry significant debt on their books, this is a meaningful differentiator.

• EPS has grown at a 5-year CAGR of about 14.7%, and in the most recent year, it grew even faster. Revenue has grown at a 5-year CAGR of 12.5%. The operating cash flow for the latest financial year was Rs. 1,395 crore, and after capital expenditure, the free cash flow came in at Rs. 996 crore. For a company with a market cap of around ~Rs. 18,000 crore, that is a very healthy FCF yield.

Now, what explains the opportunity?

• The stock is down about 35% from its 52-week high of Rs. 742. The 52-week low was Rs. 400, and it is currently trading close to that at around Rs. 450. The market has punished it, partly because fertiliser companies face periodic headwinds around urea pricing policy, subsidy disbursement delays, and raw material costs like natural gas. These are real concerns, and I am not dismissing them.

But here is what the market can be ignoring. The underlying business quality has not deteriorated. The ROCE is still high. The company is still generating strong free cash flow. It is still debt-free. And the current P/E of about 9.4x is low. The P/E looks to be low relative to the broader materials sector median of around 13x as well.

At the current price of Rs. 450, it is trading at nearly a 30% discount to my DCF-derived intrinsic value of Rs. 641. With a 15% margin of safety applied, the buy price comes to Rs. 545.

The stock is currently Rs. 95 below that. This is the kind of gap that value investors look for.

There is no guaranteed upside, but it looks to be trading at a genuine margin of protection with meaningful potential.

One thing to keep in mind. Fertiliser companies are deeply cyclical in nature. Their earnings can fluctuate with global urea prices and government policy. The current strong earnings may moderate in future years.

Stock 2 — National Aluminium Company (NATIONALUM / NALCO)

NSE: NATIONALUM | Sector: Aluminium | CMP: Rs. 432.40 Intrinsic Value (DCF): Rs. 512 | MoS Buy Price: Rs. 435 | Discount to IV: ~15%

NALCO is a Navratna public sector enterprise under the Ministry of Mines (GOI).

It is one of the largest integrated aluminium producers in Asia, with operations spanning bauxite mining, alumina refining, aluminium smelting, and power generation. The integration across the entire value chain is what gives NALCO a significant cost advantage over many of its peers.

But NALCO is a PSU. Does it really belong in a quality stock screen? I personally do not like PSU so much.

But this stock has emerged after applying the screening.

• The 5-year average ROCE is 24.6%, and the current ROCE has surged to 42.2%. That is exceptional for a capital-intensive metal manufacturing business. The ROE for the current year is 34%. Again, very high by any standards. The debt-to-equity ratio is essentially zero (0.007). The company is generating Rs. 5,806 crore in operating cash flow and ~Rs. 2,734 crore in free cash flow.

• The EPS growth story is also good. 5-year EPS CAGR is 42.7%, and the most recent year saw EPS growth of 66%. Revenue has compounded at 16.6% over 5 years. The net margin is 32.9%. This is among the highest you will find in the metals sector anywhere in India. Operating margin is 42.5%.

Now, why does NALCO look interesting right now?

The stock has had a remarkable run. It is up 171% in the past one year. It is near its 52-week high of Rs. 445. At Rs. 432, it is trading at a P/E of about 13x, which is actually at the sector median for materials.

So why is it still in the buy zone by my DCF?

Because the intrinsic value calculation, driven by very strong FCF generation and solid growth, puts the fair value at Rs. 512. Apply the 15% margin of safety, and you get a buy threshold of Rs. 435. The current price of Rs. 432 is just barely below that.

NALCO is the riskier of the two buy-zone stocks for two reasons.

• First, aluminium is a commodity business, which means earnings are heavily dependent on global aluminium prices, which themselves are driven by China’s production volumes, global energy costs, and trade dynamics.
• Second, as a PSU, capital allocation decisions can sometimes be influenced by government priorities rather than pure business logic.

But its financial quality is undeniable.

A company with the following attributes:

• Near-zero debt,
• 42% ROCE,
• 32% net margins, and
• Growing FCF is genuinely exceptional.

If aluminium prices remain firm and global demand continues to support the cycle, NALCO’s earnings could sustain or even improve from current levels.

The 4 Stocks on the Watchlist

These four stocks passed all five fundamental filters. They are high-quality businesses.

The only reason they are not in the buy zone is that their current market price is above my 15% margin of safety threshold.

They are on my watchlist, and I would seriously consider them if their prices are correct.

[Disclaimer: None of what I’m presenting in this blog should be treated as investment advice.]

Watchlist Stock 1 — Mahanagar Gas Limited (MGL)

NSE: MGL | Sector: Natural Gas Utilities | CMP: Rs. 1,133 Intrinsic Value (DCF): Rs. 1,015 | MoS Buy Price: Rs. 863 | Gap to Buy: ~12% above MoS

Mahanagar Gas is the exclusive city gas distribution (CGD) company for Mumbai and its surrounding areas. It supplies compressed natural gas (CNG) to vehicles and piped natural gas (PNG) to households and commercial establishments.

The CGD business in India benefits from a government-licensed exclusivity zone, which essentially means MGL does not face competition in its geography. That is a powerful, durable moat (monopoly business).

The numbers also reflect this quality.

• ROCE has averaged 23.8% over 5 years.
• The company is debt-free.
• EPS has grown at a 16.3% CAGR over 5 years.
• It generates Rs. 1,368 crore in operating cash flow and Rs. 353 crore in free cash flow.
• The dividend payout ratio over 5 years has averaged 31%. It reflects a management that is comfortable returning cash to shareholders.

So why has it not done well recently?

The stock is down about 17% over the past year. The culprit is the most recent year’s earnings. The EPS has declined 18% year-on-year in the latest annual period. The reason is largely a combination of rising CNG input costs (gas prices went through a sharp cycle) and muted volume growth.

Net margin has slipped to about 11.5% from a 5-year average of 17.1%.

This is a temporary headwind, in my view. The exclusivity of the Mumbai CGD zone does not go away.

• CNG vehicle adoption continues to grow.
• And the PNG household connections business is still expanding.

At Rs. 1,133, the stock trades at a P/E of 11.7x. This is well below the energy sector median.

My DCF gives an intrinsic value of Rs. 1,015. The MoS buy price is Rs. 863. The stock needs to fall another 12% or so to reach that level.

I am watching this one closely.

Watchlist Stock 2 — Engineers India Limited (ENGINERSIN)

NSE: ENGINERSIN | Sector: Construction & Engineering | CMP: Rs. 250 Intrinsic Value (DCF): Rs. 216 | MoS Buy Price: Rs. 184 | Gap to Buy: ~16% above MoS

Engineers India Limited (EIL) is a Navratna PSU under the Ministry of Petroleum and Natural Gas.

It provides engineering consultancy and turnkey project services, primarily to refineries, petrochemical plants, pipelines, and fertiliser industries.

What makes EIL exceptional among PSUs is the quality of its balance sheet and returns.

• ROCE currently stands at 37.5% and has averaged nearly 25% over 5 years.
• ROE is 29% currently and averaged 19% over 5 years.
• Debt to equity is zero.

The company is essentially a pure consultancy business. It is an asset-light, high-margin, and very cash generative business.

The EPS growth over 5 years has been remarkable, 66.4% CAGR. A 66% EPS CAGR over 5 years often implies the company was coming off a very low base in the early years of that period. And indeed, Engineers India went through a rough patch in FY20 and FY21 when project wins were low. Since then, as capital expenditure across India’s oil and gas sector has surged. New refinery projects, pipeline expansions, and green hydrogen initiatives have made Engineers India a direct beneficiary.

Revenue is growing at 9.4% over 5 years. It is a moderate and arguably more representative of the underlying growth.

The operating margin is 21%, and the net profit margin is 18.5%. For a government-owned engineering consultant, these are very strong numbers.

The stock is up 42% in the past year, which explains why it is currently above my buy price.

My DCF intrinsic value is Rs. 216, and the MoS buy price is Rs. 184. At Rs. 250, there is about 16% distance to the buy price. A meaningful correction could bring it into my buy range.

Watchlist Stock 3 — Dr. Lal PathLabs (LALPATHLAB)

NSE: LALPATHLAB | Sector: Healthcare / Medical Diagnostics | CMP: Rs. 1,392 Intrinsic Value (DCF): Rs. 1,155 | MoS Buy Price: Rs. 982 | Gap to Buy: ~20% above MoS

Dr. Lal PathLabs is one of India’s most trusted diagnostic chains. It operates through a hub-and-spoke model with hundreds of labs and thousands of collection points. It serves patients across more than 200 cities.

In the Indian diagnostics space, it competes with Metropolis, Thyrocare, and the growing organised sector.

But Dr. Lal has consistently maintained a quality advantage. In terms of brand trust, tests, and network reach, I think it has an edge.

The business quality is also good.

• ROCE has averaged 26.8% over 5 years and currently stands at 29.1%.
• ROE is 24.2% currently and averaged 21.3% over 5 years.
• The company is completely debt-free.
• EPS has grown at a 14.6% CAGR over 5 years, and the most recent year saw 14.7% EPS growth.
• Operating margin is 21.5% and net margin is 19.1%.

What is interesting about Dr. Lal PathLabs is that it has been a very quiet performer.

Over the past year, the stock has been essentially flat, down just 0.5%. Over 5 years, it has also returned nearly nothing in price terms. This is unusual for a business of this quality.

The reason is that the diagnostics sector went through a post-COVID correction. During the pandemic years (FY21 and FY22), diagnostics companies saw extraordinary revenue from COVID testing. Once that normalised, growth rates looked muted in comparison. Most of these stocks got de-rated.

The market has been waiting for the “next catalyst.”

I would argue the catalyst is simply consistent compounding of a high-quality business at a reasonable price.

The company generates Rs. 569 crore in operating cash flow and Rs. 374 crore in FCF.

At Rs. 1,392 and a P/E of about 22x, it is trading slightly below the healthcare sector median of 25.6x in my screened universe.

My DCF intrinsic value is Rs. 1,155. The MoS buy price is Rs. 982. The stock needs to fall about 20% to reach that level.

Watchlist Stock 4 — Zydus Lifesciences (ZYDUSLIFE)

NSE: ZYDUSLIFE | Sector: Healthcare / Branded Medicines | CMP: Rs. 912.90 Intrinsic Value (DCF): Rs. 739 | MoS Buy Price: ₹628 | Gap to Buy: ~24% above MoS

Zydus Lifesciences (Cadila Healthcare) is one of India’s leading integrated pharmaceutical companies. It has a strong presence across branded generics in India, the US generics market, emerging markets, and consumer wellness products. The company has also made significant investments in novel drug development, including its COVID vaccine ZyCoV-D and other biosimilar and new chemical entity (NCE) pipeline assets.

The business quality meets the bar for all five filters clearly.

• ROCE averages 20.4% over 5 years and has improved to 24.9% currently.
• ROE is 20.6%.
• The debt-to-equity ratio is 0.13. Comfortably within my threshold of 0.3.
• EPS has grown at 14.7% CAGR over 5 years and 18.3% in the most recent year.
• Revenue has compounded at a healthy 21% over 5 years.

What stands out most in Zydus is its cash flow generation.

The company generated Rs. 6,777 crore in operating cash flow in the latest financial year. It is a very large number for a pharma company of its size. Free cash flow was Rs. 2,882 crore. Net profit for the trailing twelve months is Rs. 4,615 crore. The operating margin is 25.2%, and the net margin is 18.6%.

The stock has returned only about 10% over the past 5 years, which looks poor on the surface. But a lot of that muted return came from the transition period. The company was rebranding, restructuring, investing heavily in the US pipeline, and absorbing the costs of new product development.

In recent quarters, the business momentum has been stronger, and the earnings growth is now starting to reflect the investments made earlier.

At Rs. 913 and a P/E of 18.6x, Zydus is not optically cheap.

But relative to the healthcare sector and its own quality, it is not expensive either (I think).

My DCF intrinsic value is Rs. 739, and the MoS buy price is Rs. 628. There is about a 24% gap to the buy price.

Among the four watchlist stocks, Zydus has the largest gap to my MoS price. But it also has the strongest absolute FCF generation and one of the most diversified business models.

Conclusion

The Nifty 500 is a universe of well-tracked, well-researched, institutionally owned companies. The market prices these businesses reasonably efficiently, most of the time.

When you demand high ROCE, growing EPS, low debt, consistent FCF, reasonable relative valuation, and a 15% discount to intrinsic value, all at the same time, you are setting a high bar.

The 19 stocks that passed the screening but did not qualify as undervalued are not bad businesses. Many of them are excellent businesses, just priced fully or slightly above their intrinsic value.

The watchlist of 4 is the most actionable. These are stocks where the quality is confirmed, and only the price needs to cooperate.

This is how serious long-term investing works.

Most of the time, the answer I get from my analysis is “wait.”

But the times when the answer is buy, you want to be ready. That is what this analysis is designed to help you do.

Disclaimer: Nothing in this post is investment advice. All analyses are for educational purposes only. Please do your own research or consult a SEBI-registered investment advisor before making any investment decision.